The crisp, cool air and changing fall colors remind us that winter is on its way and the end of the year will be here before we know it. Along with family gatherings and holiday functions, for many of us our thoughts also turn to year-end giving.
It’s a good time to think about charitable donations. With higher tax rates and a strong stock market, donating appreciated stock to charity instead of cash could be the way to go. However, giving significant funds thoughtfully involves considerable time and energy, and can feel overwhelming, especially during a hectic time of year. When both your heart and your tax strategy suggest that giving makes sense, but you lack the time to identify the charities that truly align with your intents, a dilemma arises. So, what do you do – now?
Enter the donor-advised fund. Donor-advised funds (“DAFs”) are charitable giving vehicles administered by public charities that help manage contributions and grants on behalf of an organization, family or individual. They are easy to establish, cost-effective, and flexible for charitable convenience. With DAFs, you can make a gift now and decide later which philanthropic causes to support. This allows you to be tax smart, diversify concentrated positions, and have time to develop a philanthropic strategy. As an added benefit, they also offer an organized way to get your family involved in charitable giving.
DAFs are similar to private foundations, but without the administrative hassle, complexity, annual distribution requirement, or excise taxes. One tax advantage of DAFs over private foundations is that you can deduct up to 30% of your AGI for donating appreciated securities compared to just 20% to a private foundation. Many people that have private foundations will top off their annual giving by contributing to a DAF the amount they can’t deduct through their foundation contribution. In some cases, such as when you are trying to diversify concentrated stock, it may make sense to gift more than the current year deduction as you are able to carry the unused deduction forward five years.
One drawback of DAFs is they have annual administrative expenses that wouldn’t be incurred if you donated directly to the charity. These expenses will vary depending on the DAF and the services desired. For donors that want help developing a philanthropic strategy, personalized education about charities, and local community expertise, the higher fees often associated with community foundations can be well worth the cost. For donors who don’t intend to use these services, expenditures can be minimized by selecting a national organization such as the DAFs sponsored by institutions like Charles Schwab, Vanguard, and Fidelity Investments.
Some things to be aware of before contributing to a DAF:
- Grants can only be distributed to IRS-approved 501(c)3 public charities.
- Grants cannot be used to satisfy pre-existing pledges or political contributions.
- Donors cannot receive any goods, services, or other benefits as a result of making grants, such as the value of a dinner at a charitable event.
- Consult your CPA before making a contribution as the tax laws around itemized deductions are more complex this year than in years past.
Donor-advised funds can be a great way to simplify your charitable giving, with the added benefit of letting you go at your own pace. If you are thinking about your charitable donations for the end of the year, now is the time to start considering the different options.
Have you had a chance to talk with your advisor about the solution that best meets your needs?
The information and opinions expressed herein may not be suitable for all investors and should not be construed as specific investment, tax, or legal advice or as an offer or recommendation to purchase or sell securities of any kind. As Highland does not provide tax or legal advice, please consult your tax and legal advisors for the specific tax treatment of transactions in your account(s) and the impacts on your personal circumstances. All data presented is current only